Choosing to Invest in Gold Futures

There are a variety of commodity futures that you can choose from to make a profit, and one of them is gold futures. The gold futures market is a trillion dollar industry, where thousands of investors are buying and selling contracts. A gold future is essentially a binding contract between two parties that indicates a future date at which a sale would occur. In order to avoid huge downturns, gold refineries and producers use gold futures as a hedging strategy. It also provides third party investors to make a profit from the price changes that occur in the market value of gold at a specific date.

When the real market sees slowdowns, people usually turn to other trading vehicles, such as gold futures. Now, just like any other investment opportunity, golf futures do have potential risks involved. Somewhat similar to what you would see with options trading, there is a whole lot of speculation in the whole process. Much of the trading is based on assumptions provided by facts and news headlines that give indications of how prices would be react in three to four weeks from the time of the contract.

Considering the volume that is used in gold futures (typically 100 ounces), even a small price movement would yield significant amounts of profit. You can also choose to buy and sell physical gold, but that would require a large amount of money, especially considering the high price of gold. Let’s assume two scenarios where one individual chooses to buy and sell gold while the other one uses gold futures to make profit.

Gold is currently fluctuating around the $1600 mark per ounce. If you only had two thousand dollars to invest, you would only be able to buy one ounce of gold, at the current market value. Suppose the price of gold rises to $1850 in six months, and you choose to sell it then. You would have made a profit of $250 in a period of six months. Despite the monetary gain, the profit is still minimal.

Now, let’s take the second individual who is willing to invest two thousand dollars in gold futures. With gold futures, you are placing an investment at a margin of 2% to 15%, so you would be able to have that margin of leverage. For our situation, assume that the margin is 4% and the investor is willing to put in two thousand dollars. For this amount, he would be able to get $50000 worth of gold on his gold futures portfolio. This works out to be about thirty one ounces, which is much more than what the first individual got for the same amount. Now, if the price of gold where to increase to $1850 again, the investor would be able to make a profit of $7800.

As you can see, gold futures are all about leverage and speculation. Despite the large profit margin that is possible, you can still lose a substantial amount of money if the price drops. Even when the market value of gold drops several cents, you will be hit by a large enough loss. Apart from the actual cost of your gold futures contract, there are commissions and fees you would have to take into account as well.